Retail Opportunity Investments Corp. (NASDAQ:ROIC) Q1 2024 Earnings Call Transcript

Retail Opportunity Investments Corp. (NASDAQ:ROIC) Q1 2024 Earnings Call Transcript April 24, 2024

Retail Opportunity Investments Corp. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Welcome to Retail Opportunity Investments’ 2024 First Quarter Conference Call. Participants are currently in a listen-only mode. Following the company’s prepared remarks, the call will be opened up for questions. Now I would like to introduce Lauren Silveira, the Company’s Chief Accounting Officer.

Lauren Silveira: Thank you. Before we begin, please note that certain matters which we will discuss on today’s call are forward-looking statements within the meaning of Federal Securities Laws. These forward-looking statements involve risks and other factors, which can cause actual results to differ significantly from future results that are expressed or implied by such forward-looking statements. Participants should refer to the company’s filings with the SEC, including our most recent annual report on Form 10-K to learn more about these risks and other factors. In addition, we will be discussing certain non-GAAP financial results on today’s call. Reconciliation of these non-GAAP financial results to GAAP results can be found in the company’s quarterly supplemental, which is posted on our website. Now I’ll turn the call over to Stuart Tanz, the Company’s Chief Executive Officer. Stuart?

Stuart Tanz: Thank you, Lauren, and good morning, everyone. Here with Lauren and me today is Michael Haines, our Chief Financial Officer; and Rich Schoebel, our Chief Operating Officer. We are pleased to report that we are off to a solid start thus far in 2024. We continue to make the most of the strong demand for space across our portfolio, especially as it relates to anchor space. At the start of the year, we had four anchor spaces that recently became available, an unusual occurrence for us given that we have maintained our anchor space at 100% leased for the past seven years. We are pleased to report that we currently have four terrific national tenants lined up to take all of the space and at higher rents. In fact, on a blended basis, we expect the increase in rent will be more than double the previous blended rent.

Turning to acquisitions, we recently acquired a terrific grocery-anchored shopping center located here in San Diego market. The property serves as the primary shopping center anchoring a master-planned community that is situated in one of the most sought after affluent submarkets in San Diego, truly irreplaceable real estate. Through a longstanding off-market relationship, the seller came to us directly, seeking to execute a quick transaction. Given that the property is located literally in our backyard, we knew this center extremely well and we’re in a strong position to accommodate an efficient closing. The center features not just one but two supermarkets, Trader Joe’s and Stater Brothers, both of which are generating strong sales numbers and have been thriving at the property for years.

In the few short weeks that we’ve owned the property, we’ve already leased the available space at the center. Additionally, several of our longstanding tenants, including a grocery tenant has reached out to us to express their interest in leasing space at the center. Safe to say, we’re very excited to own this property. In terms of the numbers, we acquired the shopping center for $70 million, equating to a six and three-quarter percent cash yield, which is north of 7% on a GAAP basis. Additionally, going forward over the next couple of years, there are opportunities to re-lease below market space and we merchandise some in-line space that should grow the yield notably. With respect to dispositions, we currently have two properties under contract to sell totaling $68 million with a blended exit cap rate in the low 6s.

From our perspective, selling these properties and effectively redeploying the capital accretively into an irreplaceable asset such as our San Diego acquisition enhances the underlying intrinsic value of our overall portfolio as well as our ability to continue growing cash flow in the time ahead. Now I’ll turn the call over to Michael Haines, our CFO, to take you through our financial results for the first quarter. Mike?

Michael Haines: Thanks Stuart. During the first quarter, total revenues increased to $85.3 million, in part driven by base rents which came in higher than our internal forecast and also in part by higher than usual amortization of above and below market rent. As we discussed in our last call, an anchor lease expired during the first quarter that was substantially below market, which accounted for the bulk of the increase and which we had taken into account with respect to our FFO guidance range for the year. GAAP net income attributable to common shareholders was $11 million for the first quarter of 2024, equating to $0.09 per diluted share. And FFO for the first quarter of 2024 totaled $37.9 million, equating to $0.28 per diluted share.

In terms of same-center net operating income, during the first quarter, same-center cash NOI increased 5.7%, which was driven by a balance of base rent and recovery increases, as well as an increase in other income in connection with our lease recapture initiatives. While the 5.7% increase is above our internal forecast for the first quarter, we remain cautious looking ahead, particularly given the anchor space re-leasing activity that Stuart spoke of. While we have all of the available anchor space currently spoken for, there will be some downtime between leases, which is reflected in our same-center NOI guidance range for the full year. Turning to our financing activities, as Stuart indicated, we recently acquired a shopping center for $70 million, while we utilize the credit line to initially fund the acquisition.

Our objective is to effectively finance the transaction with the proceeds from the pending dispositions, which we expect to close in the next 60 to 90 days. In terms of our balance sheet and financial ratios, net debt-to-annualized EBITDA was 6.4x for the first quarter, down from 6.7x a year ago. Here at the start of the second quarter, we retired in full, a $26 million mortgage. As a result, we currently have only one mortgage loan remaining for $34 million, meaning that 93 of our 94 shopping centers are currently unencumbered and this last mortgage matures in about 18 months from now. Looking ahead with respect to refinancing the bonds that mature at the end of the year, we continue to watch the market closely and are in a position to move forward opportunistically when market conditions become more settled and favorable.

Now I’ll turn the call over to Rich Schoebel, our COO. Rich?

Rich Schoebel: Thanks Mike. As Stuart highlighted, demand for space across our portfolio continues to be strong. During the first quarter, we signed 87 leases totaling over 383,000 square feet, the bulk of which centered around renewing valued anchor tenants. Specifically, during the first quarter, we renewed seven anchor tenants totaling 207,000 square feet, three of which were actually not scheduled to mature until next year. All three of those tenants came to us early, with two of the tenants seeking to renew their lease for another five years and one of them a longstanding grocery tenant seeking to renew their lease for another 10 years. As we noted on our last call, four anchor spaces recently became available totaling 179,000 square feet.

As Stuart noted, we currently have new national tenants lined up to lease the spaces, all of which will be a terrific new strong draws to our centers. Additionally, all four leases will have 10 year initial lease terms and all at higher rents. We are currently in the process of finalizing the lease agreements. Once the leases are executed, we expect to deliver the spaces expeditiously as there is only a limited amount of prep work required on our part. With respect to non-anchor in-line space, demand also continues to be strong. During the first quarter, we signed non-anchor leases totaling 176,000 square feet. And as with our anchor leasing activity, our in-line leasing activity centered around tenant renewals with a good number of them also coming to us early to renew.

In terms of releasing rent growth, we posted another solid quarter, achieving a 12% increase on new leases signed during the first quarter and a 7% increase on renewals. While our first quarter leasing volume was among one of our most active first quarters on record, we are poised to potentially have an even stronger second quarter. In addition to the anchor leases that we are finalizing, our non-anchor leasing pipeline is very strong as well, being driven by a diverse mix of necessity, service and destination tenants that are seeking to implement expansion plans across core West Coast markets. Lastly, in terms of getting new tenants open, we continue to make steady progress. During the first quarter, new tenants representing $1.4 million of incremental annual base rent on a cash basis opened and commenced paying rent.

Additionally, new leases signed during the first quarter added just over $1 million of incremental annual base rent. Accordingly, at March 31, we had approximately $6.7 million in total of incremental annual base rent from new tenants not yet open, the bulk of which we expect will do so as we move through the year. Now I’ll turn the call back over to Stuart.

Stuart Tanz: Thanks, Rich. In terms of the acquisition market and the current state of play, the recent renewed concerns regarding inflation, along with the corresponding rise in interest rates has yet again caused market activity to pause on the West Coast as a number of buyers have quickly moved back to the sidelines. We think that this could potentially work to our advantage as the year progresses, especially as it relates to off market opportunities that could arise involving private owners facing looming mortgage maturities. With this in mind, we continue to be proactively engaged and continue to have proactive discussions with our off market sources. Lastly, I would like to briefly expand on Rich’s remarks regarding tenant renewals.

From our perspective, tenants consistently come to us early, both anchor and non-anchor tenants to renew their leases for another five to 10 years out in the face of uncertain economy, we think speaks volumes as to the continued growing appeal of the grocery anchored sector in general and specifically speak to the attributes of our portfolio. It’s also indicative of the underlying strength and stability of our core tenant base and their business prospects going forward. Furthermore, following the pandemic, tenants have since shifted to being more guarded in carefully selecting the communities and shopping centers in which to expand their businesses. Needless to say, we’ve worked hard to capitalize on this shift, which is reflected in our consistently strong leasing results year after year and is what drives our disciplined acquisition strategy.

Looking ahead, we believe that our properties are well positioned today with their location attributes, compelling demographics and strong grocery daily necessity focus to continue being among the top sought after shopping centers of choice on the West Coast by these value discerning tenants. Now we will open up the call for your questions. Operator?

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from Jeffrey Spector with Bank of America Securities. Your line is open.

Jeffrey Spector: Thank you. Good morning. Stuart, I’m sorry if I missed this. Did you comment on your expectations for net acquisitions this year? Are you still in the range of $100 million to $300 million?

Stuart Tanz: Yes, we are. We are – although the acquisition market is currently paused, things can change very quickly. But yes, the answer is yes, we’re still on tap to look at external growth in that range.

Jeffrey Spector: Okay, great. Thank you. And then can you elaborate a bit more on the comments on 2Q? And I think Mike commented on expectations on 2Q leasing to be stronger. We’re seeing in some other sectors where companies are slowing leasing decisions, so I found that remark to be very interesting.

Rich Schoebel: Sure. This is Rich. As we mentioned, we’ve got these tenants lined up for the anchor spaces and the demand for the shop space continues to be very strong. We’re receiving multiple LOIs on the shop space and on the anchor space. The leasing team, while it is still taking a touch longer to get to the signature, still has a lot of demand for all the available space.

Jeffrey Spector: Great. So no evidence of any slowdown in leasing discussions?

Rich Schoebel: No.

Jeffrey Spector: And then my last, I guess, can you comment a little bit more around the senior notes coming due in December? The thinking there and is there certain trigger that would push you to execute sooner than later?

Michael Haines: I would just say, Jeff, it’s just basically market conditions. Obviously the tenure has ticked up quite a bit recently and that’s obviously not favorable for us, but it seems to move around quite a bit. So the good news is we’ve got a little bit of time before the end of the year and we’ll look to transact probably – obviously the back half, probably in the third quarter like we did last year.

Jeffrey Spector: Great. Thank you.

Stuart Tanz: Thank you.

Operator: Thank you. One moment for our next question. And our next question comes from Todd Thomas with KeyBanc Capital Markets. Your line is open.

Stuart Tanz: Good morning, Todd.

Todd Thomas: Hi. Good morning. Stuart, maybe Mike too, I just wanted to follow-up first on the net investment guidance. So $100 million to $300 million, you’re roughly net neutral year to date assuming that dispositions close in the next 60 to 90 days. I mean, how should we think about funding future investments? I think the previous guidance assumed $60 million to $180 million of equity issuance. Is that still on tap? I’m just curious sort of vis-à-vis your comments that buyers and sellers have moved back to the sideline and transaction activity may slow a bit and sort of how you’re thinking about the capital markets within all of that.

Stuart Tanz: Sure. Well, I mean, look, we’re certainly not issuing equity where our stock is currently trading. So we will accelerate, continue to look at accelerating the disposition side to help pay for more acquisitions or for more growth as we move through the year. And subject to market conditions, if the stock does move up accordingly and we can continue to buy accretively, then we’ll look to the equity market as well, but primarily being funded through dispositions more than anything else, Todd.

Todd Thomas: Okay. And then, Stuart, you mentioned roughly doubling the rent on the vacant anchor GLA. How much CapEx is estimated as it pertains to those leases? I wasn’t sure if that was on a net effective basis. And then can you provide some sense of timing around when rent may commence, assuming all the leases are executed as anticipated?

Stuart Tanz: Yes, I mean, look that it’s basically from a CapEx perspective, on all the anchor leases, you’re looking at $75 to $100. Our comment is around on a net basis in terms of doubling the rent. So as an example, the one big lease we’re on is actually with an increase, it’s over 300%. But after CapEx, as you heard in the comments, to double the rent. So we’re expecting again, as Rich touched on all – actually, one of the leases has already been executed, but the balance to be executed during the quarter delivery should take place within probably depending on how much work. What? Rich?

Rich Schoebel: Yes, we’re thinking it’s probably nine months in terms of fit out. As we mentioned, the comments, the spaces are basically in deliverable condition, but obviously the tenants will have to do some work to fit out the space for their needs.

Stuart Tanz: But I mean, I think from a rent commencement, probably early 2025, you may capture some of this late 2024, but early 2025.

Todd Thomas: Got it. And some of this will be same space, some of this will not. Is that right?

Stuart Tanz: It’s all same space.

Todd Thomas: It’ll be all the same space.

Stuart Tanz: Correct.

Todd Thomas: Got it. So we should see, as leases are executed sort of next quarter, perhaps third quarter, we’ll see that reflected in the comp leasing activity.

Stuart Tanz: That is correct.

Todd Thomas: Okay. And then last question. Just on the same store in the quarter, Mike, expenses were down, recovery income was higher. I suspect that was that dynamic is what drove sort of the growth, the higher growth relative to budget in the quarter that I think you mentioned. But I wasn’t sure if that had something to do with either some of the anchor spaces that were recaptured that were maybe paying a lower share of their expenses, but occupancy was down a little bit. Just unsure what happened there. If you could maybe talk about that and what to expect in terms of the expense recovery rate going forward.

Michael Haines: Actually, the same-store, I think, was just a combination of a variety of things. Lower bad debt this year, lower decreased operating expenses, higher base rent. It was just a myriad of number of things and variables. It came in stronger than we expected, obviously, same center moves around each quarter, sometimes fairly significantly. But again, looking at the full year, we’re still being cautious about the 1% to 2%, hopefully at the higher end, particularly given the anchor spaces we just spoke of.